ETFs Now More Popular With Advisors Than Mutual Funds: FPA

For the first time, ETFs have won out as the preferred investment vehicle among advisors in an FPA study

Worries about regulation may be slowing smart beta ETF adoption, the report says. Worries about regulation may be slowing smart beta ETF adoption, the report says.

Exchange-traded funds have won the popularity contest of investment vehicles.

According to a recent survey conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, ETFs have surpassed mutual funds in popularity. The 2015 Trends in Investing Survey found that 81% of the financial advisors surveyed are currently using or recommending ETFs with their clients versus 78% who are using or recommending mutual funds.

This is the first time since the Financial Planning Association began surveying planning professionals on their use and recommendation of various investments in 2006 that ETFs have won the “most popular investment vehicle” title among 17 other options.

“The traditional ETFs that a lot of advisors and investors have come to love have things like liquidity, you can trade them intraday [and] you don’t have to wait until the end of the day, transparency, the tax efficiency because the underlying holdings don’t often change,” said Valerie Chaillé, FPA’s practice management director, during a MoneyLife radio show episode this week. “There are a lot of things about them that are attractive to people that continue to make them – especially in an environment where the market is continuing to increase – they make them very attractive.”

Advisors were in asked in the study what they believe are the most significant advantages of ETFs over mutual funds, and 76% responded “lower costs.” Respondents also cited tax efficiency (55%), trading flexibility (50%), transparency of holdings (22%) and diversification (12%) as reasons they favored ETFs.

“There’s also a time element,” Chaillé said on MoneyLife. “What’s happening in the market might dictate whether advisors are flocking toward more passive vs. active investments.”

ETFs have gradually been gaining popularity since 2006, according to FPA’s Trends in Investing survey.  

In 2006, just 40% of survey participants said they used or recommended ETFs, which grew to 44% in 2008, 79% in 2014, and 81% in 2015.

What’s interesting is that despite ETFs' overall popularity, more specific ETFs (like smart beta ETFs) aren’t gaining as much traction among investors.

Only 22% of advisors have used smart beta ETFs with clients in the last 12 months, according to the survey.

“I don’t know how much of that is driven because advisors find [smart beta ETFs] unattractive and how much of that is driven by the fact that frankly a lot of broker-dealers and wirehouses are spooked by them because regulators are very attentive to the use of those and want to make sure investors know what they’re getting into with those,” Chaillé said on MoneyLife.

The survey asked advisors how their use or recommendation of smart beta ETFs has changed over the last 12 months, and 14% of advisors surveyed said it has increased.

“In the same way that broker-dealers and wirehouse registered reps were slower to adopt social media usage, I think the regulation and fears around that are maybe hindering the use of some of the smart beta funds,” Chaillé said on MoneyLife.

The 2015 Trends in Investing survey received 303 online responses by financial advisors of various backgrounds in March. Of those surveyed, 93% are certified financial planners and 62% indicated that they or their firm manage ongoing investments on a discretionary basis.

Other key findings from the study:

  • Advisors continue to be move away from annuities. The survey found that 38% of advisors surveyed are currently using or recommending variable annuities, compared with 41% last year, and a high of 58% in both 2006 and 2008.
  • The majority of advisors (64%) are currently re-evaluating the current asset allocation they typically recommend or implement due to the uncertain tax landscape. According to the 2015 survey, more advisor respondents are re-evaluating asset allocation strategies because of anticipated or existing changes in income tax legislation (24% in 2015 up from 18% in 2014) and investment tax legislation (28 % in 2015 up from 18 % last year).
  • Advisors are favoring a blend of active and passive, according to the survey. The majority of advisors (61%) believe a blend of active and passive management provides the best overall investment performance, which is a slight increase from the 57% that reported favoring a blend of the two in 2014. The survey also found that more advisors are likely to have increased their use of passively managed funds over the last year (24%), then actively managed funds (15%).

 

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